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How tech disruption is turning outsourcing on its head

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Marco Gianotten is CEO and co-founder of Giarte, a leading IT services and IT outsourcing research and consultancy firm. Marco has a clear-cut vision on outsourcing and is actively challenging his customers to re-evaluate their IT landscape from a business perspective.

As illustrated in this interview, Marco does not mince his words: it is high time that companies let go of their legacy, ditch the traditional SLA and rebuild the sourcing relationship on the basis of trust, commitment and healthy conflict. Alrik Hohman, deal architect at BT, joined us in this interview to explain how BT is addressing these trends through its Cloud-of-Clouds portfolio strategy.

Moving away from the pure cost perspective: IT and the business

People talk about the “new outsourcing” – is that an appropriate term? Is outsourcing changing in any significant way?

Marco Gianotten (MG): I would agree that outsourcing is changing quite fundamentally. Before, and certainly throughout the financial crisis, outsourcing was primarily cost driven. It was even seen as a means to boost shareholder value. When ABN AMRO first announced an outsourcing contract with EDS it was cheered by analysts because it promised control over the ‘monster of TCO’ (total cost of ownership).

Today, however, outsourcing is seen primarily as a means to keep up with changing technologies. The last thing you want today is a very cheap but pared down IT environment that is stuck in the past. IT used to be seen as a pure cost factor that was always too high. Now the core question is: how can we use IT to make money, to boost top-line growth? IT has become an integral part of business; we are all becoming IT companies at heart.

Alrik Hohman (AH): One consequence of that shift is the rise of ‘shadow IT’, where the business and end-users are engaging with technology outside the traditional tower of the centralised and procurement-driven IT department.

MG: Indeed, but shadow IT is also a fantastic compliment for the organisation. It shows that we may be recovering from that other Dutch Disease, our “self-learned helplessness”. For so long we have tried our very best to not understand technology. “Oh, it comes from the IT department; let’s not concern ourselves with that because we won’t understand it anyway.” Now end-users are buying and building apps, they are analysing data, and they are doing so independent of the decision making and governance of centralised IT. IT used to be so very boring; now users are seeing the fun. And as a result, they’ve lost their helplessness. There are now so many ‘IT people’ outside the IT department. IT departments are becoming smaller but that does not matter because IT people are now everywhere in the organisation.

Obviously that has a huge impact on the back-end of IT: it creates new demands on storage, networking, security and compliance. But most importantly, it implies a confrontation with modernity, in the sense that you need to accept a constant process of cannibalisation and convergence in your IT environment.

IT departments are becoming smaller but that does not matter because IT people are now everywhere in the organisation.

The modern confrontation of IT procurement and outsourcing: three key challenges

How are these new demands changing IT procurement and outsourcing? What are companies struggling with in that regard?

MG: There are at least three key challenges that companies face.

Firstly, many companies struggle to let go of their legacy.

Secondly, the business case for new IT investment is too often based on the replacement of existing technologies.

Thirdly, outsourcing relationships are managed on the basis of outdated SLAs that are completely out of touch with new realities.

Let’s address each of these in turn. Why are companies struggling with legacy? Surely companies are justified in extracting maximum returns on these earlier investments?

MG: Companies have to learn to let go of their legacy infrastructure because the truth is that such legacy has no value anymore. We’re seeing an increasing number of acquisitive companies replace all their legacy with flexible cloud infrastructures. That fits in the strategy of these companies because they want to focus on buying and integrating companies rapidly. In that context the legacy IT assets of a target company have absolutely no value; they don’t even come in the equation.

And to think that since the crisis companies have made such an effort reducing the costs of their existing IT setup, when perhaps they should have taken a hard look at the value of those assets in the first place.

Technology disruption has fundamentally changed the competitive dynamics in the market. In the past one company might be worth a little more or a little less than its competitor. Today the new reality is that the loser is worth nothing. In the past you acquired such a company for their customers and IT infrastructure. Today you steal their customers and their IT assets are worthless.

IT used to be seen as a pure cost factor that was always too high. Now the core question is: how can we use IT to make money, to boost top-line growth?

How is legacy IT shaping companies’ IT procurement?

AH: Too often companies just want to replace the telephone, when the question should be: how can I improve communication with my customers?

MG: Everyone smells the opportunities in IT - that you can make money with it, that you can pursue new markets and reduce vast amounts of waste. But that means you have to be willing to constantly change your IT environment. And the last thing you then want is to hack it all into small pieces. But that is exactly what most companies have done through their fragmented IT organisations. Why are we still talking about mobile versus fixed telephony? Why are we still pushing technologies into different internal siloes such as facilities, infrastructure and telephony?

When you buy a car your first question is not what the price of a tyre or a gearbox is. No, you evaluate the full package. Similarly, in IT you need to look more holistically at the services that you buy. But IT has a history of purchasing technical products such as gigabytes of storage and megabits of bandwidth. And they rely on traditional Quality of Service metrics such as throughput, bit errors and latency. The problem is that these factors have no meaning anymore, especially for the business and end-users. Consumers aren’t interested in the number of megabits their telecom provider delivers; they’re interested in whether they can watch Netflix. If you let IT sell Sushi they would call it wet, cold fish. They’re not selling an experience.

Today, outsourcing is seen primarily as a means to keep up with changing technologies. The last thing you want is a very cheap but pared down IT environment that is stuck in the past.

And that leads to irrelevant SLAs and unproductive sourcing relationships?

MG: A good working relationship with an outsourcing provider is based on results and accountability, but that implies trust, commitment and healthy conflict. And these features have been missing in traditional outsourcing. We utterly lacked trust. And the biggest symbol of that mistrust is the 8000-page SLA contract.

Digital transformation and outsourcing: time to bite the bullet

How should companies break that negative spiral? What do you advise?

MG: Firstly, you have to bite the bullet. You have to let go of your legacy. The digital natives like Uber and Airbnb get all the airplay, but the real heroes are the incumbent companies that have made a successful digital transformation. Start-ups and consumers have an easier time making that shift; to look ahead and ditch old technology. But as an enterprise company, if you’re dragging 40 years of legacy along, it is hard to be fast, nimble and inventive.

I think the key to success is vision and a more transparent, open relationship with your partners. With vision and early adoption of new technology, it becomes easier to bite the sour apple, the pain becomes bearable. Dare to dream about how you will make money through IT. Top-line growth initiatives are a lot more fun than cost-reduction initiatives.

Secondly, you should be buying new technology on the basis of a vision of where you want to be in the future, not on the basis of what you currently have in place. If you don’t have a vision, then you will automatically focus on cost reduction. Invite the people from BT in to talk about vision and the lessons that are being learned in other industries. Don’t talk about infrastructure.

The digital natives like Uber and Airbnb get all the airplay, but the real heroes are the incumbent companies that have made a successful digital transformation.

In this way you can build an alliance of people who share a common vision; otherwise you will always be held accountable on the basis of price. Cost reductions do not solve today’s strategic problems, because the time has come for fundamental decisions. Since the crisis companies have done nothing but cutting costs. As a result, they are now stuck with a pared down IT infrastructure and have missed the latest technology wave. They’re all shouting that they want to be a digital company but they omitted to invest. Fortunately, it isn’t too late because so much is currently available as a service.

AH: Indeed, a good example is our Life Sciences R&D cloud, a secure collaboration platform for scientists in the pharmaceutical sector. It enables scientists to, for example, test new drugs via computer modelling and manage global project groups, while making sure that they comply with the industry’s security and compliance requirements. It is a nice example of BT taking end-to-end responsibility for the business processes and end-user experience.

Which brings us to SLAs. What alternatives are there to SLAs? How can we improve trust in the outsourcing relationship?

AH: More transparency. Instead of playing with our cards held close to the chest, we should be laying them on the table. That way both parties win. Being the cheapest is not an interesting goal.

Marco Gianotten

MG: It is possible to work with more interesting KPIs. For example, let’s steer things on the basis of critical application performance and make that more transparent as opposed to the network and datacentre. Give people responsibility for applications.

Some companies are even beginning to work with Experience Level Agreement. I think this is simply part of a broader trend that companies are focusing much more on the experiences of people as opposed to the underlying processes. For example, aircraft today are designed with the traveller’s experience in mind, about how they experience space and time, including the emotive aspects. Car manufacturers have also excelled in this, and consumer IT is also now selling emotional experiences. Gradually we’ll see business IT move in that direction too.

Companies are focusing much more on the experiences of people as opposed to the underlying processes.

The changing demands from outsourcing providers

Outsourcing providers will need to change too. How is BT addressing these trends?

Alrik Hohman

AH: All these lessons also apply to BT. We have to constantly reinvent ourselves and let vision drive our technology investment. I think the Cloud of Clouds illustrates that approach perfectly. It is based on the idea that customers should be able to securely integrate and manage applications wherever they are hosted, whether in private clouds, in BT’s cloud or in third party public clouds. As a result, we are investing in massive connectivity to other companies’ datacentres. That is totally new for us. Ten years ago it would have been unthinkable that we could connect to competitors in this way. It is huge step forward in the way we are thinking about IT infrastructure.

MG: Indeed, I think the Cloud of Clouds will lead to pretty significant cultural changes at BT. It’s a lot more than simply another product.